Buy power, sell ideas

SELLING stuff to foreigners tends to be the last hope for economies whose own consumers are unwilling or unable to part with their cash. The current slump is no different, with rich-country hopes heaped on export-led growth. A new report—Trading myths—published today by the McKinsey Global Institute investigates trade, exposing a number of fallacies about how trade has developed over time, the things that are bought and sold internationally, and the impact of open markets. The first myth (some are more mythical that others, but it’s a good theme for a paper) is that advanced economies are losing out to emerging markets, so that trade deficits are ballooning. That’s not the case, as the chart below shows. In fact, the bigger story is not a myth but the mystery of why net trade is so stubbornly stable. Britain’s currency, for example, has depreciated by 20% since 2008. On paper, that should boost exports and lower imports. In reality the trade pickup has been poor.

Another myth concerns the components of trade. McKinsey recon most people think that cheap goods—imported cars and televisions say—drive advanced countries’ deficits. The truth is that rich countries import lots of oil, gas and coal, and the prices of these have been historically high since the mid 2000s (second chart). A recent article by a colleague explains this in more detail. Moreover, most advanced economies—12 out of 15—actually run a surplus for knowledge-intensive manufactured goods (pharmaceuticals and aeroplane engines, say). The big picture is that rich countries buy power, and sell ideas.

America and Britain get their ideas to the international markets in a slightly different way. Rather than exporting goods packed with ideas, their knowledge exports are bound up in services (third chart). This suggests a risk: services might be easier to copy than goods. A recent report on financial innovation, for example, made clear that in finance, new ideas are rarely patented.

A third theme of the paper is the link between trade and employment. The report starts out by dispelling a couple of jobs-related myths. Trade, McKinsey recon, is not responsible for a decline in manufacturing jobs. The loss, and it has been significant, is more to do with increased productivity, combined with weak demand. Second, the notion that trade creates only low-paid jobs is wrong. In fact, many of the jobs gained through trade have been in ideas-intensive sectors, where work is well paid (fourth chart).

This then leads to the tricky question of whether trade is one of the factors causing wage inequality in rich countries. As McKinsey say: An ongoing, as yet unresolved, debate is taking place about the impact of wages and inequality. It might appear that a 16 per cent decline in the real wages of low-skilled employees in the Unites States from 1990 to 2005, for instance, was due to a trade profile that favours the high skilled. This is an empirical question, which can be answered through research. Academics are split: some papers find a relationship, others do not. The report doesn’t cover the detail of why trade might, in some cases, lower wages. If there is a link, a strong candidate would be the ‘specific factors’ trade model popularised by Paul Samuelson. The broad idea is that essential inputs—which could be capital, land or labour—used by the export sector will become more valuable as that sector gains from opportunities to sell internationally. So chemists and turbine designers in rich countries get a wage boost. By a similar logic inputs only in import-competing sectors do worse. That could mean that workers with import-specific skills might see wages reduced with more trade. Even if this link exists, the solution is not less trade, as McKinsey rightly point out. That just makes the size of the aggregate pie—for all countries—smaller. Instead, rich countries first need to clear the trade channels debris left by years of tariff and subsidy distortion. This will ensure a greater aggregate gain from trade. To sustain this, they need to prevent valuable ideas being pinched, by promoting intellectual property rights. Finally, to reduce inequality, those lacking export-specific skills need to be trained up so that more workers gain from the opportunities trade brings. Overall, McKinsey offer policymakers a simple menu: open up your trade channels, protect your ideas and educate your workforce. Simple to say, but hard to do.

Related

Readers of this blog know that one of the themes here has been dismantling pervasive "protectionist myths" that mislead the public into supporting - and thereby empower politicians to implement - anti-trade policies.

By Mary Hallward-Driemeier & Gaurav NayyarThe global economy is undergoing profound change.New technologies are impacting prospects for manufacturing-led development that has brought rapid prosperity to many parts of the world.

George Osborne has said that “a sustainable recovery must be led by private sector investment and export growth.” Today’s figures show how far away we are from the latter. These show that our non-oil goods deficit in the last three months, at £21.7bn, was only slightly smaller than it was in 2008Q3.

The Vice President makes some hard headed arguments about the risks that companies such as Exxon and mutual funds who invest in such fossil fuel companies are likely to face in the future. While I like his piece, it is a convenient piece for an activist to write and he misses some basic economics.

OTTAWA — Canada’s export market isn’t broken, just bent, and consumers aren’t spent out, but the country can’t afford to rely on those two factors alone to keep growing the economy.
The remedy? A sustained recovery in the United States, mixed with a strong dose of optimism in other advanced countries, such as Japan and those on the mend in the eurozone.
That’s the prescription doled out by TD Economics in its quarterly assessments of Canada, the U.S., and global economy as a whole.

OTTAWA — Canada’s trade deficit leapt in April as imports hit a record high and exports edged down, a further sign that exporters’ woes are curbing economic growth, Statistics Canada data indicated on Tuesday.
The April deficit hit $567 million, slightly more than the $550 million shortfall forecast by market operators. Statscan revised March’s initial $24 million surplus to a deficit of $3 million.
That revision means Canada has now posted 16 consecutive monthly trade deficits.

Exports in Context
Anybody who follows forecasts of GDP growth for 2011Q1 will notice that over time, estimates have been revised down (this is true for Macroeconomic Advisers, for instance). The dimmed prospects for GDP growth throws in high relief the importance of net exports. From the WSJ, "Foreign Shocks Temper America's Export-Led Rebound":
To an extent unique in post-World War II history, the U.S.